Bank ETF, Banks Exchange Traded Funds
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Table of Contents
Why Bank ETFs
Bank ETF is a subset of financial ETFs. Bank ETF invests in stocks of banks listed on the index that it follows. Bank exchange traded funds are extremely volatile and maintain a high liquidity.[br]
Why Bank ETFs
Banks are the epicenter of all the financial activities, be it the forex market, credit market or others. Due to its high volatility and liquidity, bank ETFs can be easily traded on margins. Smaller or big traders can easily track the price movements and go short or long depending on the favorable situations.
Types of Bank ETFs
Most of the bank ETFs has diversified portfolios. On the basis of their underlying assets, the bank ETFs can be classified in the following two categories:
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Community Level
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Global level
The first category ETFs invest in stocks of community banks that span different areas. These small banks avoid complex financial investments that big players involve in and they just stick to basic banking functions such as accepting deposits or lending.
Some characteristics of these banks are:
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They have shown brighter balance sheets during the period of downturn.
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They shy away from sub-prime lending and other financial instruments.
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Despite their limited scope, bank ETFs tend to invest in a large number of stocks of different banks. This decreases risk.[br]
On 1st July, 2009, First Trust Advisors L.P launched a community level bank ETF with about 96 different stocks for diversification.
The portfolio excludes:
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The 50 largest banks (asset size)
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Any bank that operates internationally and has an international specialization as per the data of FDIC, Federal Deposit Insurance Corporation.
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Any credit card specialist bank.
The other leading bank ETFs are:
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iShares Dow Jones U.S. Regional Banks Index Fund (IAT)
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KBW Bank ETF (KBE)
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KBW Regional Banking ETF (KRE)
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Powershares Dynamic Banking Portfolio ETF (PJB)
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Regional Bank HOLDRS ETF (RKH)
Tips for Bank ETFs
Researching, assessing and evaluating the portfolio of any ETF is important, even more so for bank ETFs.
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Make sure that the portfolio is not limited to one type of bank (credit etc) or one region.
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Study the activities the banks are involved in. Too much of international activity implies huge losses during a downturn.
The best policy for bank ETFs is to focus on diversification.
